Changing consumer outlook may prompt foreign brands to re-evaluate their strategies

On Sept 1, Estee Lauder Shanghai reduced the prices of its Clinique's four-star products in China. Following the announcement, prices of the 125 ml Clinique Dramatically Different Moisturizing Lotion declined by 26 percent to 340 yuan ($53.97, 41.56 euros) from 460 yuan, while the 50 ml Moisture Surge Intense was nearly 31 percent cheaper at 340 yuan from the 490 yuan earlier.

The price cut was indeed surprising as the company had increased the prices of most of its products in overseas markets by 5-25 percent on Aug 1. The price reduction in the Chinese market was contrary to the existing norm of companies pricing imported cosmetic products in the Chinese market at least 10 percent higher every year.

Not surprisingly the move received widespread attention with some customers indicating that they would now prefer to purchase Estee Lauder products in China rather than abroad.

For Estee Lauder, the price cuts were done more with a view to narrow the price gap between China and other markets, as well as to encourage local consumption and enhance market competitiveness.

Commodity prices are often determined by cost and corporate pricing strategy. First of all, the price must cover the cost of raw materials, processing, sales channels, marketing, tariffs and taxes. Then based on its competitor's pricing strategies and consumers' purchasing habits, the company decides if its pricing strategy is oriented to cost, demand or competition.

In China, relatively high marketing and distribution costs are racking up the prices of foreign cosmetic products. In the absence of strong Chinese competitors, many foreign brands normally adopt a "high quality, high price" strategy based on customer perceptions. This is also the main reason why foreign brands are more expensive in China.

In China, consumption of highly priced foreign brands is considered a symbol of social status and lifestyle, and an indicator of individual wealth. Thus big discounts are common in overseas markets, but rare in China. Some brands even have a fixed quota of price increases every year to maintain their high-end image.

While the difference in costs and tariff is the normal base for companies to fix prices, they may also consider the same based on consumer opinion.

According to discriminative pricing theory, companies can use differential pricing to maximize its profits if they satisfy the following criteria:

Consumers do not know that they are being treated differently when buying a product or in other words, the so-called "back to back" purchase.

Consumers are aware of the discriminative pricing, but commodities cannot be transferred between different consumer groups, or the costs for transfer are too high.

However, the rapid development of the Internet has minimized the cost of information transfer to essentially zero, and educated consumers are quick to get the prices around the globe. The growth of e-commerce such as B2C and C2C has enabled transfer of commodities at low costs between different consumer groups.

There can be endless debate on whether the price difference is primarily caused by foreign brands or China's tax system.

Due to the appreciation of the yuan, discounts and promotions announced by companies in overseas markets, domestic price increases, higher per capita income in China, and frequent people exchanges between nations, and the pricing differences between domestic and overseas markets has made overseas purchasing into a big industry. Outbound shopping tourism is also on the rise. Shopping malls in the US, Europe and Japan are now swarmed with Chinese shoppers.

Statistics show that in 2011, the outbound consumption of high-end merchandise by mainland travelers reached $46 billion (35.5 billion euros), far exceeding the total amount of spending in the domestic market. The disadvantages brought by this situation such as decrease in taxes has drawn the attention of the Chinese government.

This has also posed a big challenge for foreign brands in terms of internal management, including operating costs and performance evaluation.

Take Estee Lauder for example. Although more Chinese are buying its products, its business in China is under considerable pressure. If it cannot create enough differences in services between different regions, narrowing the price difference is perhaps a good choice.

The pursuit of fairness, equality and freedom is deeply rooted in human nature. Big price differences between different regions will inevitably lead to consumer dissatisfaction and resistance. Some Chinese consumers have started to complain about the discriminative prices of foreign milk powder, cosmetics and healthcare products.

In the first half of this year, the total number of China's cosmetics imports fell by 13 percent from the same period last year, while overall imports declined by 14 percent.

The earth is flattening, and foreign brands should also re-examine their implementation of differential pricing, and make a change.

The author is a researcher at the China Europe International Business School in Shanghai. The views expressed here are not necessarily those of China Daily.

(China Daily 09/28/2012 page7)